Having 50 States Is a Bit of a Drag

In a recent essay, Harvard economist Martin Feldstein listed some reasons we might expect the U.S. to have higher rates of economic growth than other industrialized countries. I agree with most of his list -- high entrepreneurialism, world-class research universities, a good work ethic -- but there’s one factor I don’t buy. It’s this: “The U.S. has a decentralized political system in which states compete. The competition among states encourages entrepreneurship and work effort and the legal systems protect the rights of property owners and entrepreneurs.” Unfortunately, we’re probably at the point where American federalism does more to hinder than to help growth.

One problem is that people simply aren’t that mobile any more. Moving across state lines has declined by about 50% from the average over the period 1948 to 1971. This has happened for a variety of reasons, including the aging of America, the rise of dual-income couples, and the fact that some regionally based job attractions, such as automobile manufacturing in Detroit, are no longer so significant. The net result is that state governments don’t have to worry as much about dissatisfied residents moving out. These days that is either harder to do, or people are simply less interested in making a fundamental change. The competitive checks and balances on state governments are correspondingly weaker.

Another problem with interstate competition is that bad policy at the state level tends to reduce real estate values. The incentive to leave just isn’t that great if you have to sell your home at a loss or if a lower home value makes it harder to afford the move.

Voting is also a weaker check on power than in times past. The evidence indicates that voters know much more about national issues than issues at lower levels of government.

State and local voters have never been especially well informed, but still many votes were determined by a general sense of whether the incumbents were doing a good job or not. In earlier times, it was more common for a registered Republican to opt for a local Democratic candidate, or a Democrat might prefer a Republican candidate, on the basis of perceived performance. That gave state-level candidates some incentive to do a better job.

One unfortunate side effect of today’s political polarization is that voters are more likely select state and local candidates on the basis of whether those individuals profess the same ideology -- as defined at the national level -- as the voter. In other words, if you think the federal government spends too much on transfer programs, you are more likely to vote for the Republican in your state, whether or not your state spends too much on transfer programs. The incentive for candidates is then to stake out relatively extreme and easily observed positions, to attract the most commonly held ideology in each state. The news media, by devoting most of its coverage to the most highly visible national candidates and issues, makes this problem worse.

One study found that when it comes to votes for the state legislature, the most important factor was the popularity of the sitting president and the president’s party. How well the state’s economy was doing was relatively unimportant. Again, that hardly creates strong incentives for good practical performance. Many state and local issues are more about competence than ideology, including road maintenance, running the prison system and helping to fund K-12 education.

Finally, the states are often making policy where they shouldn’t. If there is an antitrust suit, should a company really have the burden of facing so many different courts and the possibility of 50 different state settlements? Should each state really have a separate bar exam for practicing law in that jurisdiction? The more heavily regulated a society, the more significant these extra burdens become.

I do still see a significant positive role for federalism in the U.S. For instance, governors, state legislatures and attorneys general are checks on federal power and influence. The states can be laboratories for policy experiments, such as with marijuana law, perhaps later to be adopted at the federal level. Most of all, I yearn for the time when Americans were more mobile and less polarized, and hope that someday those national features will return to improve our federalism. In any case, we’re such a big country we can’t do without it.

In the meantime, I regard American federalism as at least as much a burden as a benefit. And by the way, eurozone economic performance, while unimpressive, has in recent times been besting the U.S.